Table Of Content-----~-
MONEY AND ECONOMIC GROWTH
Tilburg studies in economics
Vol. 17
Money and economic growth
lAC. I. SUBEN
Tilburg School of Economics,
Social Sciences and Law,
the Netherlands
c!:Jvfartinus~ijhoff Social Sciences Division
CLeiden 1977
ISBN-13: 978-1-4613-4242-7 e-ISBN-13: 978-1-4613-4240-3
DOl: 10.1007/978-1-4613-4240-3
© 1976 by H.E. Stenfert Kroese B.V., Leiden, the Netherlands.
Softcover reprint of the hardcover 1s t edition 1976
No part of this book may be reproduced in any form by print, photoprint,
microfilm or any other means, without written permission from the publisher.
Photoset in Malta by Interprint (Malta) Ltd
To the memory of my father
To Ria and Leon
Preface
In monetary theory the paramount problem posed by many eco
nomists was always whether monetary variables had a certain
influence on the real variables in the economy, so that money would
not be neutral but influence the economic process. In this way the
outcome would differ from that of a barter economy. The outcome
of this development was that money could no longer be regarded
as an accommodating item like in many out-dated text-books but
as an autonomous factor, the influence of which is explicitly ana
lyzed. When, after the Second World War, the 'real' side of eco
nomics developed into growth economics, it was quite natural that
efforts were made to integrate both lines of thought so that the
effect of the rate of increase of money on the rate of growth of
real national income could be studied.
Dr. Sijben gives the full and thorough story of these efforts in
a way that enables economists to compare the different approaches
more easily than was possible up to now. More specifically the
various models are made comparable by the use of the same sym
bols for the same variables allover the book. After the introductory
chapter Tobin's outside-money model in a neo-classical framework
is discussed. What is income in this respect? Tobin argues that real
disposable income is real net national income plus the real value
of the increase in monetary balances. Johnson holds the view that
cash balances are so convenient that they are a part of real con
sumption and of real income as well. Levhari and Patin kin analyse
the consequences of this refinement of theory of which practical
applications will not be available in the short term.
The Keynes-Wicksell approach, discussed in chapter three is
more truly dynamic and leaves more room for disequilibria, as it
deals with excess demand and excess supply of commodities. Insti
tutional market arrangements come into the picture. On the basis of
a synthesis of both neo-classical and Keynes-Wicksell approaches
in chapter four the conclusion is reached that outside the equi
librium situation the Keynes-Wicksell is more relevant and that
VllI PREFACE
within this situation the neo-classical analysis is the best to explain
the process of monetary growth.
In the final chapter Dr. Sijben has given an evaluation of the
findings in the preliminary survey. Some theories are dependent on
assumptions that are so subtle and rather far from reality that they
cannot be regarde'd as reliable guidelines for practical policies.
Much can be done however to improve the practical significance of
these theories: the traditional notion of money can be extended in
the direction of the notion ofliquidity and money substitutes. Situa
tions of less than full employment could be taken into account
more tha.n.h.as-beeD-the case up to now, balance of payments pro
blem& can be included in the model,as well as the influence of the
government budget connected with the problem of inside and out
side money. It is Dr. Sijben's opinion that the aspect of the money
supply is neglected too much in the theories that were dealt with in
the foregoing chapters.
Summarizing I think that Dr. Sijben, by an extensive study of
all the relevant literature, has given a fair and clear exposition of
the relevant theories, making them more comparable than up to
now. For this part of monetary theory it is an indispensable guide
to further developments in this field of economic theory.
Dr. H. W. J. Bosman
Professor of Money and Banking,
Tilburg School of Economics;
Social Sciences and Law,
the Netherlands
Contents
Preface / VII
Introduction / XI
1. General introduction to the monetary growth theory / 1
2. The neo-classical monetary growth theory / 11
2.1. Introduction / 11
2.2. Tobin's monetary growth theory (implications of the asset
structure) / 14
2.3. The implications of real cash-balances as a consumer
good / 28
2.3.1. Immaterial consumption of real cash-balances / 28
2.3.2. Influence of the immaterial consumption-effect according to
Johnson / 31
2.3.3. Levhari and Patinkin's analysis / 37
2.3.3.1. Influence of the rate of monetary growth on the equilibrium
value of capital intensity / 37
2.3.3.2. Influence of the rate of monetary growth on the equilibrium
value of real cash-balances per head / 48
2.3.3.3. Monetary neutrality in a growing economy / 49
2.4. The implications of real cash-balances as a producer
good / 51
2.4.1. The productive services of real cash-balances / 51
2.4.2. Influence of a change in the rate of monetary expansion / 53
2.5. The stability of the neo-classical monetary growth
model / 63
3. The Keynes-Wicksell monetary growth theory / 75
3.1. Introduction / 75
3.2. Suppositions / 77
3.3. The short-term model / 89
3.3.l. The IS-FM equilibrium / 89
3.3.2. The influence of a change in the rate of monetary
expansion / 98
3.4. Long-term equilibrium analysis / 100
X CONrn~
3.4.1. The relation between the rate of inflation and the nominal
rate of interest / 100
3.4.2. A change in the real cash-balances / 106
3.4.3. A change in the expected rate of inflation / 109
3.4.4. A change in the labour-capital ratio / 111
3.5. Influence of a change in the rate of monetary
expansion / 115
3.5.1. Algebraic formulation / 115
3.5.2. A verbal interpretation / 119
4. A synthesis of the neo-classical and the Keynes-Wicksell
monetary growth theories / 123
4.1. Introduction / 123
4.2. The modified price change equation / 124
4.3. Long-term equilibrium analysis / 127
4.3.1. An algebraic formulation of equilibrium / 127
4.3.2. A graphical interpretation of eqUilibrium / 128
4.3.3. Influence of a change in the rate of monetary
expansion / 135
4.4. Short-term dynamic analysis / 137
4.5. The rate of inflation and the nominal rate of interest / 143
4.5.1. The Gibson-paradox / 143
4.5.2. Empirical results / 150
5. Evaluation, summary and conclusions / 155
5.1. Introduction / 155
5.2. Money from a medium of exchange to an asset / 155
5.3. A critical analysis of the present monetary growth
theory / 164
5.4. Suggestions for extension of the present monetary growth
theory / 185
Appendices / 189
List of symbols / 201
Bibliography / 203
Index / 213
